As part of the Fed’s year-long review of its monetary policy strategy, tools and communications practices, the St. Louis Fed is assembling members of its six advisory councils, representing a geographically and industry-diverse group of stakeholders.

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Chris Phelan: Hello. We’re here discussing student debt as part of the Center for Household Financial Stability’s Generation Debt: The Promise, Perils, and Future of Student Loans. Joining me today is Paul Combe from the American Student Assistance.

Paul Combe: Thank you.

Chris Phelan: Thank you for joining us.

Paul Combe: Thank you for having us.

Chris Phelan: So, first question, before we get into some of the current issues in student loans, could you talk a little bit about American Student Assistance? What do you do? And maybe some of your programs.

Paul Combe: Sure. ASA is a 50-year-old nonprofit focused on access to higher education. And in the last 15 years we actually focused on helping borrowers manage their debt. Our simple point is, access doesn’t end until the student loan is repaid. So we really focus on helping people manage the debt that they receive as they go through college. Debt is—the way we finance education in this country, it’s like 65 percent of all the financial aid available. And so we need to actually provide the kinds of services to those students who take out the debt so that when they leave, it’s not hurting them economically.

Chris Phelan: Now can you talk about—your organization has a variety of different programs. Is there one particular program that is maybe the most utilized from your organization?

Paul Combe: Well, right now we’re focusing on—we’ve developed a website called SALT money dot org (saltmoney.org). And our SALT program is focused on outreach to students in their last two years of college and three years after college to provide them the financial tools they need—financial competencies they need—to actually manage the debt when they leave school. And then provide them the services they need to get into the right payment program. So behind the website, there are all kinds of blogs and budgeting tools and loan tools and so on. But it’s all supported by trained counselors who actually understand the Federal Regulations and so on. So in the end, they have someone they can actually talk to to help them get into the right payment program. And that’s SALT money dot org (saltmoney.org).

Chris Phelan: Okay. And, now, you deal with—you deal with students. Is there a specific profile of a student borrower that tends to come to American Student Assistance more frequently? Are you services more tailored to a certain type of individual?

Paul Combe: Yeah. That’s why—it’s a good question. Because one of the key points you have to think about—when you say student, everybody tends to have this picture of a young 20-something—if you talk about a graduate. When you’re thinking of student loans, it’s a very wide range of populations. And we need to really think about focusing on different populations. You know, there are graduate students who are walking out with an MBA who needed a little help in financial acumen. And there are also students who are dropping out of a community college after one year. And there’s a wide range of levels of understanding services that they need. So our focus is really aimed at those people who are leaving school and trying to avoid the debt. So we’re practically trying to get—encourage them, “Don’t avoid it. You can’t get—it wont go away. You’ve got to look at it. You’ve got to face it.” And those people who know they have a problem and want to deal with that problem. That’s really the core element. And that means we really have to be proactively reaching out to them because they’re not the population that responds readily to materials and so on. They are actually the population that’s trying to avoid the issue.

Chris Phelan: Well, if I can follow up on that.

Paul Combe: Yeah.

Chris Phelan: So you speak to a wide range of students and engage—I guess—across the educational spectrum—is there one pitfall that trips up students more than others?

Paul Combe: Well, the major one is avoiding the debt. It’s the Federal Loan that we’re talking about—student loans. It’s non-dischargeable in a bankruptcy. It follows you for the rest of your life. That one that—I talk about populations we’re dealing with. We have a small percentage of population that we’re dealing with who are retired and having their Social Security garnished because they defaulted on a loan 25 years ago. You know? So you’ve got to think about this problem and that longevity of a normal repayment for a student loan is ten years. So that puts them in their mid-thirties, which is the time they’re buying homes and so on. And if you go into extensive repayment, it could be up to 25 years. So—and if you default on it, it just keeps pushing it out further. So the—there is—this is not a student problem, per se. It’s an economic problem. And it covers 37 million Americans who are all across the age spectrum.

Chris Phelan: Well, and that’s what we’re here to talk about today, right? The promise, perils, and future of student loans. So if I can follow up with that, we’re going to be talking about a lot of issues. And I know you’ll raise a few, but when we think more broadly now, not just the student, but from a more macro policy standpoint—what is the biggest issue in the student debt market that we need to think about?

Paul Combe: The core issue is—if I—from a policy perspective—is the fact that we’re not providing the kinds of information the student need at the individual level. We’re not giving them the kinds of content that they need to actually manage this debt. So we’re essentially giving 17-year-olds an open-credit card to borrow and not giving them any information as to how to manage finance, in general, and the student debt, specifically. There are a lot of repayment options the Federal Government offers. In fact, there’s probably—our point is that no one ever should default on a student loan. You have to practically go out of your way to do it. And that’s the point about the avoiders. You know? But there are solutions for everybody. But it takes some time and effort to go through those solutions. It takes some counseling, and it takes some guidance. And we’re just not doing it properly. We haven’t done it properly. The Federal Government focuses only on how many people they originated loans and how many people defaulted and don’t focus on all the activities in between. And there’s a wide spectrum of people who are doing fine with their student loans. Other people who are struggling but making the payments. Some people are going in and out of delinquency, which affects their credit. Other people are just about the default. And we’ve got to think about that spectrum and provide the help and the range of services that get all those people into good standing. One of our points at ASA is we have—94 percent of our borrowers are in good standing. And that’s because we proactively reach out to them and get them into the right payment program. Whereas, nationally, based on the date as best we could find from the Federal Reserve, it’s about 70 percent that are in good standing.

Chris Phelan: So you raise the date of question. And we are, here at the Federal Reserve, a very data-driven organization.

Paul Combe: Right.

Chris Phelan: But a lot of folks in this space—I mean it is about data, right? It’s—we’re in the age of big data. So if I could ask, what is the data that we don’t have right now that you think would actually help this process to make—you know—to make better decisions and make better policy?

Paul Combe: This—it is simply the data on the full range—that full spectrum I mentioned.

Chris Phelan: Hm-hmm [affirmative].

Paul Combe: It is the data on that full range—some strong understanding of where people stand and this is what the impact is. If you think of the average debt today that people are graduating with and average salary of a college graduate, it represents somewhere around 20 percent of their debt-to-income ratio—their ability to borrow in the future and as a consumer. Yet we don’t know how many of them have defaulted—have gone delinquent—which means their credit is nipped. The cost of every other purchase goes up and so on. And there are a lot of studies that are showing the impact of this. There was a recent study by the New York Fed that showed that people with college debt don’t have as much assets or aren’t buying the same value of homes that people who didn’t have debt. And that includes people who never went to college. So there’s an impact there, but we’re not really focusing on the actual data of where the people are in the process. And the Federal Government said the Department of Education focuses on what’s called a cohort default rate—which, actually, only it looks at the defaults within a three-year period. So we’re only looking at a very small subset of people and the impact on this and ignoring the vast majority of them. So if that’s a—roughly running 10 percent right now—cohort default rate. There are 90 percent of the people that we’re not actually exploring what the impact is in this. So we need to pull that data. That’s why the Fed has done such a good job, because at least someone is now looking at this as consumer—these people as consumers and the impact of the debt on them as consumers and, therefore, the economy.

Chris Phelan: So—and my final question then—and just to follow up on a few things you said—it seems as though there are some opportunities—particularly from some of the government agencies directly involved, but then also obviously, the Federal Reserve and other federal and quasi federal agencies are involved in this space. What do you need more of? Or what do students need more of from the Federal Government and entities such as the Fed in order to—I guess—move forward more positively, on tackling this issue?

Paul Combe: Well, there’s a strong push today on financial literacy, in general. That’s one of the things that we lack in our country. And that’s a key element to this—of providing the services. And one of the points that we’ve sort of discovered that—if we think that the student loan is a problem, we’re going to try to solve it from that end. If you think of it as actually a learning opportunity—it’s a teaching opportunity because you’re taking people who are starting their loan. You can give them information they need at the time they’re originating the loan. And as they’re accumulating debt, more information and more information and how to manage the debt, and so on. So it becomes a very strong teaching tool from a financial literacy point and a financial competency perspective. You know, that’s the type of thing we need. So from our perspective, ASA is basically funding 90 percent of what we’re doing ourselves. We’re working with 250 colleges who are sponsors for people on their campus, but that represents a small percentage of the cost because they can’t afford to actually—counseling. These are half-hour conversations with—you know—training counselors are expensive. So how do we develop the policies that allow that kind of education opportunities to be supported properly? And a part of it says it’s not the Federal Government’s sole responsibilities. Like access to education—we have multiple parties who are supplying funds—the Federal Government, the states, the colleges—you know—corporations through scholarships, and so on. Everybody’s helping to get access we need to flip that same thing, and how do we develop the incentives for everybody who gets involved in the repayment process? So, like, corporations, it’s—we provide our employees with repayment incentives on their student loans. It’s one of the best benefits we have for retention tools because our people are college educated. And it helps them pay off their loans and keeps them there. So we have very high-level engineers and ISD and so on who stay with us because we’re helping them pay the loans. And that’s a positive incentive. And how do we do that on a national scale? The sad thing is, how do we get the Federal Government to take some of the profits? Huffington Post just did a story about the profits of the Federal—on Federal Student Loans. How do we take some of that profit, quote end quote, and actually siphon it back to the students to give them the information, paying for the information needed. Create incentives for states to get involved. So there’s a whole policy dialogue that we need to have about how to get the information to them. So the first point is to understand they need it and then start looking at how to supply it.

Chris Phelan: Great. We’re six months out from a whole other round of graduates entering—

Paul Combe: Right.

Chris Phelan: …high-school graduates entering—many of them making the college choice. So, given that—and I’m sure you’ve spoken to quite a few of those individuals already—but what advice do you have for high school graduates about can I enter this world of not just college, but clearly, paying for college?

Paul Combe: Well, there’s—you know, there are three things I’ve done. I’ve been a financial aid officer, I’ve done counseling, I’ve worked on campuses and so on. And there are three things I think are constant through this: People should apply to the college of their choice. You know, they should look at the college as an academic thing—not just as a financial—what’s the cost—but get in the program that’s going to get them where they want to be—that will satisfy their goals and so on. Get into the school that will satisfy them culturally. You don’t want to be in a remote community college somewhere, as opposed to in a big city because you’re really more comfortable in a big city. You’ll do better. Or, second thing is, apply for financial aid. Regardless of what you think—regardless of what you think your income is, go through the process and apply for financial aid. You know, you want to maximize your benefits—the federal benefits that are available. And the way to do that is get that application in regards to what you think. And the third is simply be a consumer. And people forget about that last one. And that’s the thing we’re talking about today, is being a consumer. This is the major purchase for a family. It’s second to their house. And for the individual student, it’s going to be the first major purchase they’ve made, which is going to have—because of student debt—it’s going to be with them for a long time. So pay attention to it. This is not the same kind of purchase like you’re buying a car, you cut the deal, and you’re done. It covers four years. So you’re making a commitment the first year. And you’ve got to think about all those other years and the financing of those years and what it’s going to be like and comparing that to your jobs and so on. That’s not saying you should change, but knowing that you’re—want to be an elementary secondary school teacher and you’re going to have $30,000 of debt when you leave, you need to pay attention to it. There are ways of financing it. There are ways of getting into programs that help it so you can do that. You know? But you’ve got to pay attention to it and really focus on that consumer side.